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HMRC internal manual

Business Leasing Manual

From
HM Revenue & Customs
Updated
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Defining long funding leases: funding leases that are not long funding leases: short leases: excluded leases: disqualifications

Not all leases of plant or machinery that meets the definition of background plant or machinery in CAA01/S70R (4) are excluded leases of background plant or machinery. Plant or machinery that meets the definition of background plant or machinery in CAA01/S70R (4) is not excluded from being a long funding lease in two situations.

First situation

The first situation is where the amounts payable under the mixed lease (i.e. the lease of the building and the plant or machinery) or any other arrangements vary or may be varied by reference to the value to the lessor of the plant and machinery allowances on the background plant or machinery.

Therefore, for example, where the lease of a building provides for the rentals to vary according to how much expenditure qualifies for plant or machinery allowances and / or by reference to the rate at which allowances are available will not contain derived leases that are excluded as leases of background plant or machinery.

It is likely that any such leases are performing a financing function and therefore whether or not a derived lease of plant or machinery is a long funding lease will depend on whether or not it meets the usual tests.

Second situation

The second situation is where the main purpose, or one of the main purposes, of entering into

  • the mixed lease,
  • a series of transactions of which a mixed lease is one, or
  • of any of the transactions in such a series

is to stop the long funding lease legislation applying to the background plant or machinery so that the lessor gets plant and machinery allowances on it.

The reference to ‘any other arrangements’ in the first bullet ensures that the disqualification applies where the payments under the lease remain unaltered but other payments are or may be varied as a result of the value to the lessor of the plant or machinery allowances.

An example of one situation where this rule would apply is where a lessor buys a building for (say) £10m. The building contains background plant or machinery with a value of £4m. The building is leased under a lease where the lessee pays the lessor a premium of £6m, none of which is attributed to the plant or machinery. The result is that the lessee is, in effect, only financing the plant or machinery.